The Quagmire of An Untended Family Member’s Estate
We wrote recently about the temptation to help yourself to a family member’s wealth to help yourself get along in life. A case decided by the Pennsylvania Supreme Court in September reminds us that sometimes, people who should be tasked with cleaning up a deceased family member’s estate never get around to it.
Enter the Estate of Mary Ann Caruso. Back in 1983 Mary Ann teamed up with two of her kids to create a real estate business. They did it properly, complete with a partnership agreement. In 1997 she conveyed her interest to her kids ion equal shares and then died.
In 2003 one of the sons also dies, leaving a surviving spouse named Geraldine.
Paragraph 14 of the partnership agreement anticipated this. Specifically, it said that the surviving partner(s) had 90 days to arrange to buy out a deceased members interest based on the “net book value.” That’s a term that invites mischief when any appreciating asset is involved, but we digress. The surviving child of Mary Ann took not action to effectuate a buy-out and Geraldine, as surviving spouse of the deceased sibling also took no action to have her interest cashed out. So, business went on as if there were two partners, with the income being paid to the deceased partner’s spouse, Geraldine.
The matter sleeps for a decade but in 2013, Geraldine doesn’t like how she is being treated and sues her brother-in-law for an accounting. His response is: “You are not a shareholder.” Her reply is that she is half owner of the business as successor in interest to her late husband. In 2015, the sole surviving son of Mary Ann also dies and leaves his interest to his daughter. At this point Geraldine walks in with a check for $117,000 and says to her niece, “I am buying out your father’s interest for half net book value” per the terms of Para 14 of the Partnership Agreement. The niece replies just as her father had in 2013. “You ain’t a shareholder.” Thus, the issue was joined.
At the trial court, summary judgment was entered against Geraldine on the basis that she could not testify as to any transactions with her now deceased brother-in-law under the Dead Man’s Rule (42 Pa.C.S. 5930). She appealed claiming that she didn’t need to testify to this because she had succeeded to her late husband’s interest when he died in 2003. The Superior Court reversed indicating that there were still triable issues of fact. In Round #2 the trial court decided she was an owner and entitled to buy out the shares from her brother-in-law’s estate. There the court noted that the tax returns for the business identified Geraldine as an owner but she never signed the partnership agreement.
The Superior Court affirmed reminding all that a partnership does not need to be in writing. Murphy v. Burke 311 A.2d 904 (Pa. 1973). Moreover a 1924 case, Underdown v. Underdown held that parties can agree to continue a partnership by conduct after one partner dies. 124 A. 159. (1924) The Supreme Court granted allocatur to consider whether a person who did not form the partnership and was not a third party beneficiary of the agreement can assert ownership rights under the agreement.
The conclusion reached by the Supreme Court is that while partnership agreements need not be written, you can’t become a partner to a written agreement by implication. The Court notes that during her administration of estate of her husband Geraldine took no steps to clarify her interest as successor owner to her late husband. It found that Geraldine took no steps clarify that she was a successor owner and there was nothing in the partnership agreement indicating an intention to allow her to step into the shoes of her husband upon his death. This prompted the court to conclude that Geraldine never showed an intention to acquire the buyout rights set forth in the shareholder agreement, an agreement she never actually became a party to.
There aren’t enough facts to effectively deconstruct what really happened. But it looks like Mary Ann saw her end coming so she transferred her interests to her kids. When Geraldine’s husband died in 2003, one suspects that the surviving partner did not want to raise the cash to make a buyout of his brother’s interests. Instead, he chose to just treat his sister in law like she was a partner, paying her profits and issuing a like minded K-1. But when she asserted rights as an owner he resisted. Then he died, prompting Geraldine to assert a “put” of his shares to her at “net book value.”
On balance this is a close call and this observer thinks the Supreme Court got it right from a policy perspective. A true shareholder/partner needs to sign up for the good, bad and ugly. The surviving son seems to have passed on his right to acquire his deceased brother’s shares for half of “net book value.” Many people in his place are not excited about raising cash to acquire a dead brother’s shares. To his credit, surviving brother seems to have remitted to his sister in law her 50% of the profits without quarrel. It does no credit to the sister in law (Geraldine) that she didn’t step up and say “I need to be formally in and to sign the partnership documents.” So, both “owners” seem to have been content to do nothing. Then, surviving brother dies after 12 years of ignoring the problem. Now Geraldine turns from passive to aggressive, insisting she is a partner and imbued with the right to effect a buyout under a partnership agreement she never signed. Query; is this a common law partnership implied in fact but not imbued with the terms of the old written partnership which never admitted Geraldine as a partner? The idea is mentioned at page 22 of the opinion, but the court notes it lacks facts probative of what was intended from 2003-2013.
The other issue is not squarely addressed but one of the challenges if there was to be a settlement was defining “net book value.” That’s a term that needs to be fleshed out and one that needed an efficient appraisal procedure to decide what “net book” meant. Book value of real estate on an ordinary balance sheet is quite different than fair market value.
The circumstances here are not unique. In 2021 a client asked me to serve as executor of her estate. She died unexpectedly in early 2023. When I went through the voluminous papers she had in her residence, it became clear that she was quarreling with her sister over the estate of their mother who died in 2003. Some research revealed that the surviving sister had administered the mother’s estate but never sold or did anything about her mother’s house. This 3-bedroom 2,500 square foot residence has sat empty and neglected for more than 20 years and the property remains titled in the name of a person dead that long. My client (now deceased almost two years) is entitled to half the value of that home. Had the executor sold the home and the proceeds been invested in an index fund, the sisters would today have more than $1,000,000 to share. Instead, the house sits empty for reasons no one has yet explained.